Welcome to the New Enforcement Environment

With the Department of Labor (DOL) and other federal agencies slated to receive millions of dollars in funding to expand their programs (and to hire new enforcement officers), employers need to be aware that the customary operating basis may no longer be acceptable—for the simple reason that it could be illegal. I’ve lost track of the times a client faced with a Department of Labor audit, accompanied with potential steep fines and penalties, tried to justify their behavior by claiming that "that’s how everyone in my industry does it!" Wise up, folks. It could be that everyone in your industry is doing it wrong.

Employers would be prudent to do some self-inspection in the following areas to see whether changes should be made before the Department of Labor or another agency comes knocking (and, yes, unannounced inspections are on their list). Don’t compare your employment practices to your neighbor—learn what is right under the applicable laws. Consult with employment counsel for guidance about these and other areas where potential problems lie:

Independent Contractor or Employee: Paying someone who provides you with a service on a 1099 basis does not make him or her an independent contractor. The Department of Labor and other agencies that care about such things will look at such factors as: 1) the degree of control the company exercises (Do you tell them when and where to work? Is their work closely supervised? Do you critique and correct poor performance? Does the person need permission to take time off?) and 2) the provision of protections, compensation and/or benefits (Does your company provide workers’ compensation insurance? paid vacation days? paid holidays? health insurance?). Misclassification can cause the company to owe unemployment compensation, workers’ compensation fees and overtime pay, not to mention back taxes to the IRS and parallel state agency.

Exempt or Non-Exempt: Paying an employee on a salary does not necessarily exempt him or her from the overtime pay requirements. Unless your employee fits into one of the recognized exemptions to the federal and state overtime pay laws, the employee needs to receive overtime compensation for every hour worked over 40 in one work week, whether paid on a salary or not.

Miscalculating Overtime Pay: Even companies that recognize that certain employees are entitled to overtime pay fail to calculate it correctly. For example, they look to see whether the employee has worked over 80 hours in a two-week pay-period, instead of over 40 hours in one work week. They provide the employee with "comp time," instead of overtime pay (which is unacceptable except in certain public sector jobs, unless the time is made up in the same work week). They fail to include bonuses and other payments in the calculation of the employee’s basic wage rate when computing overtime pay owed, just to name a few errors.

Mishandling Commissioned Sales People: Paying sales people on a commission-only basis does not necessarily exempt them from the overtime pay laws (or from the minimum wage laws). Ensure your sales people are properly classified and properly paid. Having written commission agreements can help.

Failing to keep time-records: How can you expect to demonstrate that your employees are being paid properly if you do not keep accurate records of when they work?

Creative Compensation: This shouldn’t need to be said, but we do run into this—paying employee compensation in unreported cash or other similar, creative ways is illegal.

The various federal agencies increasing enforcement efforts are doing so to ensure employees are being properly treated under the applicable laws (a noble purpose). Employers caught in the new enforcement net, however, can pay huge fines and penalties, on top of any compensation (or insurance contributions, e.g. for unemployment insurance) deemed to be owed. Don’t get caught unaware of your legal obligations. As they say, ignorance of the law is no excuse—and no one needs costly litigation or agency audits in these times. Companies can, and should, minimize their legal risks by learning the legal requirements in these various areas, conducting self-audits and consulting with legal counsel to ensure compliance under the applicable laws.

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